Sydney's resilient apartment market to be tested in 2018

The Inner Sydney apartment market has remained remarkably resilient in face of a large construction boom

October 25, 2017

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​According to JLL's last research report, the Inner Sydney apartment market has remained remarkably resilient in face of a large construction boom, with prices continuing to increase and a still tight rental market. With the supply boom reaching a crescendo, as many as 3,200 apartments will complete in the final quarter of 2017, this will further test the market.

JLL's Head of Residential Research - Australia, Leigh Warner said, "We expect that the market will continue to slow in coming quarters, with APRA's macro prudential measures and Chinese capital restrictions dampening investor demand and still a considerable amount of supply due to complete in the next few quarters.

"However, we do not expect widespread over-supply. Sydney's recent construction boom has been making up for a decade of under-supply. Market balance has certainly now moved back to around equilibrium with recent supply additions, but the continued low vacancy rate and rental growth is the strongest indication it has not tipped into over-supply," he said.

JLL's Sydney Apartment Market Indicators Report October 2017 quotes the latest REINSW data that shows rental vacancy across Inner Sydney remained at a very low 2.2% in September 2017, while strong rental growth of 6.1% was recorded over the 2016/17 financial year for two-bedroom apartments and 3.8% for one-bedroom apartments.

Mr Warner said, "The supply pipeline is reaching a peak now and will fall in 2018. The combination of slower pre-sales demand and tighter development lending criteria by the major banks is acting to self-regulate supply levels. However, there is still considerable construction yet to complete that will further slow price growth and soften the rental market over the next few quarters, particularly in certain pockets of high supply concentration."

JLL Research data shows approximately 4,500 new apartments have completed in Inner Sydney to date in 2017, with the total count expected to reach 7,800 by year-end. This is compared to 5,000 completions in Inner Sydney last year.

Looking forward, 40% of the total pipeline to 2022 is in Sydney's Inner South (Waterloo to Botany), and a further 25% in the Inner West (Leichardt to Sydney Olympic Park).

Despite lending restrictions and some downward price pressures in small pockets of the market, the JLL Report suggests there has been no evidence of an increase in settlement defaults. Sydney properties settling are still generally holding a substantial equity buffer given substantial capital value growth in this cycle. Consequently, both domestic and foreign buyers are finding ways to settle, even if the process take a little longer than normal.